Behavioral Finance

Understanding Client DNA Behavior Under Pressure

When I was a financial planner and even before that a CPA, I had regularly observed that people’s behavior and decision-making patterns changed when they were under pressure; the pressure often being caused by money and relationships. This observation was fundamental to my thinking when I was building the Financial DNA Discovery Process with my team. We wanted to know what a person’s natural instinctive behaviors are as this would be key to predicting how they would really behave when there were difficult times and/or difficult decisions had to be made.

This plays into the research we recently did of 100 advisors with AUM over $50million. 70% of them said that they were surprised by their clients reactions. Why? Well, it is the natural DNA behavior taking over based on genetics and our very early life experiences which shape the neural pathways in the brain. In the good times, we all operate out of learned behaviors based on experiences, education and values. Hence, we have a greater chance of managing our emotions in favor of rationality. Under pressure, that switches.

It was interesting to read the Wall Street Journal Article on Saturday April 4 by Jason Zweig titled: “Influence of DNA on Your Investing Style in Troubled Times”. Whilst different methodologies were used to discover this DNA behavior than we use, the conclusion is much the same. Zweig made the following point based on his own interview with Dr. Ahmid Hariri at the University of Philadelphia: “There is always a tug of war inside each of us between nature and nurture. But during scary times like these, says Dr. Hariri, “environmental stresses can play a critical role in unmasking any underlying biases determined by your genes.” In other words, bear markets give nature the upper hand. It is now harder than ever to stick to the disciplines that can override your genetic impulses, but it also has never been more important”.

So, now more than ever is the time to truly discover your client’s DNA behavior and help them from the inside-out to achieve higher financial life performance.

Should You Be In The Business?

I have had some interesting discussions in the past week with financial advisors and managers of advisors. With the financial downturn everyone is evaluating where they are at. The big question being asked is: “Should you be in the business?”

My feeling is that over the next 1 to 3 years many current advisors will give up or be forced out. When you think there is research showing that 89% of clients are considering switching advisors there is much to think about. The financial services landscape is going to change dramatically. There is no easy street any more. Those totally committed to the industry with the right business model will prosper greatly if they stay with it.

So, getting directly to the point, whether you stay in depends on the answers to the following fundamental questions:

1. What are your talents and expertise?
2. What are you passionate about?
3. What is the vision for your life?
4. What is your purpose?
5. To what extent is money a primary driver of your decisions?

Financial down turns will always bring out what your true desires are. Everything in your life gets called into question particularly when your income goes down and there are angry clients to deal with (rightly or wrongly).

Taking a positive approach, this is a great opportunity to really discover what you love about being a financial advisor and re-create your niche. However, you are going to have to be very committed to work through the changes but it will be exciting and career/business changing.

Fix Corporate Behavior… Fix the Board

I have had some interesting discussions in the past few weeks with business leaders from many different industries and backgrounds in the United States. One of the areas that consistently comes up is poor corporate governance. As mentioned in my last blog most of the economic problems we have right now are due to the behavior of our leaders.

Being direct, alot of leadership behavior is not properly monitored. So, a key step towards fixing the problems we have today would be to change the corporate governance structures in publicly traded companies. In particular, I believe that the roles of Chairman and Chief Executive/President must be separated. You cannot have the Chief Executive of a company also its Chairman. This places far too much power in the hands of one person. Decisions for the company will largely be made by that person ? and while that leader may have many great strengths, he or she may also have alot of blind-spots and biases which will go unchecked. Further, that leader may be tempted to make decisions out of self-interest – whether it be remuneration, selling the company or make any decision which benefits him or her.

You only need to look at the evidence out there to see how many great companies have been destroyed in the last 10 years because there has been a leader who is too dominant and acted out of self interest which has gone unchecked through proper board governance. I do not believe investors should invest in companies who do not have the right corporate governance structure. Having the Chairman and CEO being the same person is very risky and at some point could mean the company is seriously endangered. So, as businesses restructure and investors start looking for good opportunities sound corporate governance should be one of the main factors considered. Taking this point further, the remuneration levels of the CEO’s should be reviewed. Frankly, in many companies they are way out of line compared to the value brought to the table by that person.

Manage the Human Risks in Your Business

At the moment there is alot of talk about the collapsing business and financial environment. For everyone it is having an impact in all sorts of ways. Of course, we all look at the numbers side of the equation; but what about the people side? What are the human risks in your business? How are your people behaving in these times? Then, also, how do you want them to behave to handle the crisis and then build your business going forward?

We have been working with many companies all over the globe on managing and developing their human capital. In this regard, we have been using our Business DNA Business Risks Matrix. Please click on the link to review a summary.

Have a look at the balance of human behavioral risks in your business versus the environmental business risks. You can see alot of attention needs to be given to the employee and leadership behavioral risks. This is where businesses win or lose.

Being very frank, the current financial and business environment has been caused largely by poorly managed human behavior. Poor financial and business circumstances do not entirely happen themselves. Look at the leadership of the companies around you. How we move out of it will depend on all of our behavior. How are you going to be a leader and manage your human capital?

Recently, we launched our new Business DNA behavioral profiles. The insights from these profiles will be outstanding predictors of how your business is going to develop and where many of the roadblocks are. For more information visit:

Behavioral Profiles Leverage Your Intuition

In the financial services industry there are a lot of supporters for the use of behavioral profiles as part of the client discovery process and there are some detractors from using them. Like in any situation where there are detractors most have not yet had a positive experience or seen the full benefits or simply have been listening to the wrong information. This is human nature.

Overall, I do believe that you can never have enough information about yourself, your clients and also your team. As Benjamin Disraeli said: “The most successful people are those who have the most information”. Of course you also need to have the best and most accurate information.

In my past few blogs I have made a very strong case for how by discovering the behavior of your clients you can help them achieve better investment returns and overall make better decisions. So accepting there are very strong benefits for discovering the behavior of your clients, the question becomes how do you do it? This is where there is a great divide. Although, in my view an unnecessary division of thought and approach. At the center of great client discovery is asking the right questions, or what I call “powerful questions”. I believe this is more effectively done when you use behavioral profiles and your intuition, not one or the other.

For some, client discovery is only done by asking questions and gauging the reaction of the clients to the questions in terms of how they respond. To a large degree, in this situation the advisor is relying on their intuition to firstly ask the right questions and then secondly to assess the response. There is no doubt a person’s intuition can be very strong particularly with a lot of experience and high degrees of self understanding and overall good people skills or what we call emotional intelligence. However, no human being can be perfect and we all have “blind spots” or things we do not see. A person’s blind spots will also be carried across into how they see others. Your ability to understand another person can be significantly impacted by how you are on that day let alone how the client is on that day. So, no matter how good your intuition normally is it is not always going to be accurate. Nevertheless, do not discard your intuition. That “gut feeling” or pulse of energy can be telling you a lot even if you have not yet analyzed all of what it means. A behavioral profile will help you with that analysis.

I know that I am a highly intuitive person and naturally learn a lot about people from conversations and asking questions. This is particularly true now that I have learned to get out of my own way and also because much better listening and empathy skills have been learned. Even then I still do not see everything. I am able to go much further and make the person I am mentoring or conversing with feel far more understood when I use profiles.

The point is that the “human element” is variable and we cannot by ourselves see everything at all times. So, what can we do to make our intuitive radar stronger? This is where well constructed and highly validated behavioral profiling systems that objectively measure human behavior can be used to leverage your intuition. As is illustrated by the graphic, there is a great amount of “below the surface” information about a person you need to find out about very quickly to help them make the right decisions. Further, the person also needs to know it for themselves so the have personal clarity. Often the 10% we see on the surface is the “party manners” and not the real person.


The specific benefits of using behavioral profiles in the discovery process to build a financial life plan include:

  1. Enhanced objectivity, consistency and measurement
  2. No assumptions are made about the client
  3. The provision of a natural starting point for safe discussions with clients on their unique terms
  4. Separation of your and the clients emotions ? avoid advisor bias
  5. Acceleration of trust because the same discovery questions are asked of each person within a couple, family, team
  6. Clients are better equipped to better articulate their thoughts when emotional
  7. The ability to more quickly gain greater clarity of issues which you intuitively identify
  8. Specific identification of strengths, struggles, aptitudes which provides a human capital development framework for wealth mentoring and coaching
  9. The ability to better manage client expectations based on greater clarity of needs and goals
  10. Serve the clients on their unique terms: “one client – one plan”
  11. Meet the know your client rules because through better documentation and discussion of client behavior
  12. Increases the transferability of the client relationship because the client behavior is data based

In using a behavioral profile the key is to firstly understand the purpose of the instrument and what it was designed to uncover. Then secondly, understand how to properly use it in client facilitation to get the maximum benefit for you and the client. The great users of a behavioral profile understand it is a tool which gets below the surface but it is not a substitute for discussions. Further, one has to be realistic that even the most reliable and accurate profile will not tell you 100% of who a person is. However, they can tell you a lot. As already said the profile is supposed to leverage your insights and ultimately improve the client experience. The key is your “bedside manner” in using the profile.

Investment Risks Rooted In Human Behavior

A statement I have been making to many people for the last 10 years is: “Investment markets cannot be controlled, but how you manage your reaction to them can be”.

Generally, for most investors the reason that they obtain returns which are on average 6% lower than market returns is because of their behavior. Investors generally make poor investment decisions because of their reactions to events and also to their own life circumstances. This can be because they do not know who they are or how to manage their emotional impulses which are driven from how they are wired to behave. I really want to emphasize that successful investing is about managing your behavior.

If you are an advisor, it is about predicting and managing your client’s behavior and also managing your own behavior. So when you talk about managing investment risk, what you are really talking about is managing BOTH human behavior and the market risks. This is fundamental to the value proposition for obtaining advice from an advisor. Clearly, it is important that the advisor also has a high degree of financial emotional intelligence.

Traditionally, when risk is talked about in investing, everyone talks about market risks and to some degree investor risk tolerance. The reality is that there are so many more risks which need to be addressed which all have an impact on the investment decisions made. These additional risks are behavioral. To make the point, I have prepared the following table which highlights many of the “Investment Impact Risks” that can influence investment decisions and ultimately the investment returns a person achieves. This is what needs to be managed.

Click Here for the illustration.

So, there is a very strong case for every person to have behavioral guidance from an advisor no matter how knowledgeable or experienced they are with investments. The behavioral guide or what we call a “wealth mentor” needs to have a true understanding of a person’s Financial DNA which is their financial behavioral style. The Financial DNA is shaped from genetics, early life experiences and then overall life experiences, values and education. At a broad level, the behavioral information that needs to be discovered is in the following categories of information, as they all impact the investment decisions made in some way.

The reason we advocate that investors and advisors (the behavioral guide) complete behavioral profiles early in the advisory process is because they provide objective and measurable insights into the complete financial behavioral style on a holistic basis. With a good behavioral profile, not only is the risk tolerance discovered, but also completely who the person is at a much deeper level than what any normal person can reliably do on their own. You truly get below the surface. Remember, no matter how evolved you are personally, we all have blind spots and biases. Very often clients “eat” the behavior of the advisor. So, the advisory process becomes dangerous if the advisor is not aware of his or her blind spots.

Which ever angle you come from they all lead to the point that investment risks are rooted in human behavior.